MDR McDermott International Inc

Energy-focused engineering and construction company McDermott International (MDR) reported bright first quarter 2011 earnings, aided by higher sales and strong backlog.

The company reported earnings per share (EPS) of 29 cents in the quarter, at par with the Zacks Consensus Estimate and up 31.8% from 22 cents in the prior-year quarter.

McDermott generated revenues of $899.2 million in the quarter, up a whopping 78% from first quarter 2010 and way ahead of our expectation of $758 million. The quarterly performance was buoyed by strong contributions from the Asia Pacific and Middle East segments (attributable to increased marine activity on large engineering, procurement, construction and installation or EPCI projects).

During the quarter, the company’s operating income leaped 37.0% year over year to $100.3 million, on the back of a strong Middle East business unit.

Backlog

At the end of the quarter, McDermott had a backlog of $4.8 billion, compared with $4.1 billion in the prior year. As of December 31, 2010, backlog was $5.0 billion.

Balance Sheet

As of March 31, 2011, the company had $209.2 million cash on hand and long-term debt (including current maturities) of $65.1 million, representing a debt-to-capitalization ratio of 3.9%.

Our Recommendation

We believe that Houston, Texas-based McDermott will reap benefits of the strong industry fundamentals through 2011 and beyond, given its geographic footprint in high-growth regions, as well as its technology leadership and efficient execution skills.  The order flow and backlog for the company’s products and services are expected to remain healthy and trend higher in the near-to-medium term.

However, following The Babcock & Wilcox Company (BWC) spin off, McDermott has transformed into a less diversified concern with a greater business risk profile. Moreover, the company remains exposed to the highly volatile oil and gas fundamentals and commodity price fluctuations. Hence, we see limited upside potential for the stock and maintain our long-term Neutral recommendation.

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